Gold rush for mining M&A coming

Talks between Barrick Gold Corp. and Newmont Mining Corp. over a deal that would have combined the world’s two largest gold producers may have broken down, but that doesn’t necessarily mark an end to their potential merger or consolidation among metals miners struggling to cope with challenges in the sector.

“The mining industry is facing a three-pronged problem of lower gold prices
/quotes/zigman/698029/realtimeGCM4, higher production costs and a relatively empty pipeline of new projects in developments,” said Brien Lundin, editor of the Gold Newsletter. “To counter this, companies will increasingly seek to bolster their production at the expense of their competitors through acquisitions, and to cut overhead through mergers.”

The “mega-merger concept came about in an attempt to find true cost savings and economies of scale — both at the corporate and operational level — for Barrick and Newmont,” said Jeffrey Wright, managing director at H.C. Wainwright.

“With gold and silver prices coming down over the past year and still facing labor inflation pressures, all of the miners are faced with identifying ways to lower either corporate or operational cost inputs,” he said. “A merger of this size would/could produce both results by eliminating one corporate suite along with regional operations in Nevada and elsewhere.”

But just because a deal was not struck last week does not imply the talks have been abandoned,” he added. “I believe this will revisit itself in the coming weeks,” so there’s a 50-50 change of completion. Shares of Newmont were last up 5.9%, while Barrick’s stock fell 3.6%.

“The first movers in an M&A rush get the best prizes, so I expect the Osisko fight and the Barrick-Newmont talks to ignite more deals in the days ahead,” said Lundin. “Having just recently gone through a spate of severe rationalization of their property portfolios, companies will try to avoid over-spending for assets. But anything can happen in bidding wars, and investors will find some opportunities to profit.”

But stocks of major mining companies have been “waning as of late,” said Adam Koos, president and portfolio manager at Libertas Wealth Management. “Looking out a few months, gold miners as a basket/sector are still in a downtrend and I’d still consider miners to be a bottom-fish play.”

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